Asset prices regime-switching and the role of inflation targeting monetary policy

Ioannis Chatziantoniou, George Filis, Christos Floros

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    Abstract

    This paper provides the empirical framework to assess whether UK monetary policy shocks induce both the UK housing market and the UK stock market to remain at a high-volatility (risk) environment. The Markov regime switching modelling approach is employed in order to identify two distinct environments for each market; namely, a high-risk environment and a low-risk environment, while a probit model is employed in order to test whether monetary policy shocks provide this predictive information regarding the current state of both markets under consideration. Our findings indicate that monetary policy shocks do indeed have predictive power on the stock market. In addition, in both asset markets there is a key role for inflation. Results are important especially within the framework of the inflation targeting monetary policy regime.
    Original languageEnglish
    Pages (from-to)97-112
    JournalGlobal Finance Journal
    Volume32
    Early online date20 May 2016
    DOIs
    Publication statusPublished - Feb 2017

    Keywords

    • WNU
    • United Kingdom
    • Inflation targeting
    • Markov regime switching
    • Forecasting
    • Asset prices

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